Fundamentals of Project Financing

The overall aim of this workshop is to equip participants with a comprehensive overview of project financing by taking them through all stages of a project financed transaction. Specifically, participants will be equipped to:
1. Apply a structured and systematic approach to assessing project finance transactions
2. Recognise the key characteristics of a robust project and identify the weakest links in the transaction
3. Use qualitative and quantitative tools and measures to distinguish the key risks
4. Interpret each of the risks to determine their severity and potential impact on the transaction structure
5. Appreciate how the mechanisms in the transaction documents operate to protect the creditors and evaluate the protection provided
6. Build a credit rationale in order to make and substantiate investment decisions.

Build a credit rationale in order to make and substantiate investment decisions. 

The workshop will make extensive use of case studies and exercises which can come from the following sectors:
1. Public-Private Partnerships (PPP) 
2. Infrastructure & Public Services Projects (Transport, Municipal) 
3. The power sector 
4. Oil/gas, natural resources and industry projects.

Target Audience 
This workshop is aimed at those professionals working for investment or commercial banks, investment funds or fixed income investors, who are interested in the principles of analysing project finance risk and the main elements of structuring project finance debt. It is not aimed at experienced project finance practitioners who already have a sound understanding of the basic analytic process and structuring of project finance.

Content

STRUCTURE AND INFORMATION
The aim of this section is to evaluate the position of the project vehicle as well as the role of the sponsors and contract partners.

Ownership and Sponsors:
1. Characteristics of strong sponsors 
2. Ownership structure and relationship with key parties to the transaction 
3. Operational and financial resources; strategic importance.

- Project Investment Criteria:
•Measures used by Investors; Payback period, NPV, IRR 
• Measures used by Lenders: Leverage, Debt service, Loan Life, Project or Reserve Life Cover Ratios and economic rationale 
• Rating agency default statistics and rating criteria.

- Project Vehicle Status and Project Structure:
•Project vehicles and parties involved 
•Segregating cash flows and de-linking from related parties.

- Jurisdiction, Legal and Expert Reports:
•Issues to consider: Legal framework, licences, regulation, legislation etc. 
•Project contracts: Off-take contract and concession agreement.

- Information Quality:
•Considerations for reliance on external technical reports: clarity, transparency and timeliness 
•Application: appraisal of project structure in case study.

- ASSESSING THE RISKS:
The aim of this section is to identify and evaluate the main project risks.

Completion risk:
1. Contractors: attributes of strong contractors 
2. Cost structure: contracts, budgets and allocation of costs 
3. Delay risk and contract terms: capacity to accommodate delays and transferring risk 
4. Technology risk: factors which increase technological risk.

Operational risk:
1. Operator: uncovering risk related to the operator including performance, reputation, and financial position 
2. Supply risk: quality and price of resources and products required for operation 
3. Technology risk: Obsolescence/Economic Life/Remediation 
4. Costs: make-up, timing and potential volatility of operating costs 
5. Revenue risk /Off-take: demand risk arising from multiple payers 
6. Tail risk: potential impact on cash available for timely debt service 
7. Early termination risk: events which may lead to termination pre-maturity and lenders' step-in rights.

Macro risksk:
1. Country and political risks: role of governments and related sovereign risk 
2. Macro economic risks 
3. Industry Risks: sector outlook for established and developing industries 
4. Social-environmental exposures 
5. Application: assessment of project risks in case study

DEBT STRUCTURE - DOCUMENTATION:
The aim of this section is to assess the appropriateness of the capital structure and debt structure features. 
1. Funding Providers and types of funding 
o Development banks, export credit agencies, bilateral funds, commercial lenders, capital markets, offset and barter.
o Senior debt. hybrid and subordinated debt. 
2. Debt profile 
3. Amount, term, amortisation schedule, currency and interest rate mechanisms 
4. Borrowing base mechanism in oil/gas and mining sector 
5. Security and credit rights 
6. Payment waterfall 
7. Collateral and assignment of contract rights 
8. Rights of the controlling classes, inter-creditor issues 
9. Structural features 
10. Debt service covenants 
11. Reserve accounts, cash sweeps, profit distribution controls 
12. Refinancing risk 
13. Application: assessment of debt structure and term sheet for case study.

DEBT SERVICE AND COUNTERPARTY RISK:
The aim of this section is to determine the project's capacity to generate stable cash flow to service the debt levels.

1. Using base case and appropriate stressed sensitivities 
2. Assessing project's debt service capability by using metrics: DSCR, LLCR, PLCR 
3. Financial counterparty risks: creditworthiness and structural features to mitigate risk 
4. Application: assessing debt service capability using cash flow forecasts and assessment of counterparty risks for case study.

FINAL GROUP CASE STUDY AND PRESENTATION(S):
The aim of this section is to apply all the aspects of project finance assessment as addressed during the workshop to a separate case study. The work will be prepared individually - as homework the previous day - and presentations will be prepared in small groups. It will cover the following issues:

1. Project structure and parties 
2. Project risks 
3. Proposed debt structure and term sheet 
4. Project debt service capability using cash flow forecasts 
5. Counterparty risks 
6. Conclusion.

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